What's in store for Global Banking?

Banking around the world may now be passing through a major cyclical correction, but McKinsey research suggests that the industry’s revenues and profits will double by 2016.
Miklos Dietz, Robert Reibestein, and Cornelius Walter
January 2008
With the midsummer credit crunch taking its toll, 2007 turned into a bleak year for the world’s big financial institutions, and 2008 may not be much better. As executives respond to the immediate pressures, however, they should maintain a clear perspective on the long-term outlook, which in our view is considerably brighter. Despite the current correction, we believe that during the next ten years the growth rate of the global banking industry will exceed that of GDP. Driven by powerful basic trends, such as demographics and the math of wealth accumulation, the industry will likely more than double its revenues and profits over the period.
Just as strikingly, McKinsey research also indicates that the industry’s patterns of growth will be diverse and uneven. Our comprehensive analysis of data since 2000 suggests that banking is one of the global economy’s few large industries that isn’t rapidly converging around a single structure or following the same market dynamics everywhere. Indeed, banking’s revenue performance has varied sharply and unexpectedly within regions, countries, subsectors, and product groups—and will continue to do so.
More than in other major industries, it appears, long-term success in banking hangs on being in the right place at the right time. Over the last ten years, for example, 88 percent of the growth in the revenues of Europe’s 20 largest banks was attributable to market momentum—in other words, competing in or entering territories and market segments that enriched everybody. Moreover, timing is critical. Buying into retail-banking markets across Asia in 2000 would have destroyed value over the next four years, as falling stock market multiples more than offset revenue growth. Buying into them in 2004, however, would have been richly rewarding.
In the text and exhibits that follow, we explore the global banking industry’s rich mosaic and highlight some of the core characteristics identified by our research. Our conclusions offer bank strategists and other senior executives a more detailed understanding of the size and composition of different banking markets, as well as insights into future profit trends.
What’s in store for global banking
Big and getting bigger
The industry with the largest profits . . .
In 2000, the global banking industry’s future looked decidedly downbeat: the Internet was widely expected to compress margins, thus disintermediating or even commoditizing many parts of the business. Banks mostly missed out on the stock market upturn that followed the dot-com debacle, though their empty M&A pipelines were partly to blame.
In retrospect, the gloom proved unwarranted. Global after-tax profits for banks soared to a historic high: from $372 billion in 2000 to $788 billion in 2006, or $672 billion in constant dollars. Along the way, banking became the industry with the highest absolute level of profits (Exhibit 1). In fact, those of US banks alone—$328 billion in 2006—were larger than the combined profits of the retailing, pharmaceutical, and automotive industries around the world. What’s more, in that year the banking industry’s profits per employee were estimated to be 26 times higher than the average of all other industries, and its $2.8 trillion in revenues equaled 6 percent of the global GDP.
. Is set to double its revenues and profits by 2016
The recent stellar performance of the banking industry has, however, proved unsustainable in the short term—not surprising, given its cyclical nature. Corrections inevitably follow peaks, as we have seen from the events of Black Monday (1987) and the dot-com debacle (2001). That appears to be happening now, and the most recent estimates put the profit impact in the hundreds of billions of dollars.
While short-term movements are highly uncertain, the underlying long-term trends, we believe, are encouraging. The industry’s upward path should resume in due course thanks to demographic trends, wealth accumulation patterns, financial innovation, the rapid development of energy markets, and globalization.
Exhibit 2 shows that whatever happens in the next one or two years, global banking profits, as a proportion of total corporate profits, will probably remain at or above their historical high on a ten-year view. Furthermore, our base-case scenario indicates that global banking revenues will grow, on average, by a healthy 7.5 percent a year from 2006 to 2016, compared with an average of 8.0 percent a year from 2000 to 2006 (and 12.6 percent from 2002 to 2006). Although our ten-year projections show annual growth rates for revenues slowing somewhat, they still exceed current forecasts for GDP growth by more than one-half of a percentage point a year over the period. Consequently, we expect the industry to generate $5.7 trillion in revenues and $1.8 trillion in after-tax profits by 2016—more than twice the levels at the end of 2006.
Looking ahead, we project that emerging markets will contribute roughly half of the absolute growth in new banking revenues from 2006 to 2016, while North America and Western Europe will account for 25 and 20 percent, respectively. Russia, we believe, will continue to be one of the fastest-growing large markets in the next few years, and China will maintain its recent accelerated growth rates. In the next tier, certain other Asian countries, especially India, will overtake the countries of Central and Eastern Europe.
In the world as a whole, we expect the growth rates of retail assets and credits to converge as a result of the savings of the emerging middle classes of Asia, Central Europe, and Eastern Europe. Wholesale banking will probably undergo some restructuring in the next ten years, with investment banking, as well as sales and trading and securities services, providing a larger relative share of the revenues. What’s in store for global banking
Diverse and likely to remain so
The growth of products and countries
Our analysis of the historical data highlights the striking diversity of banking around the world—something we expect to continue for the foreseeable future. Consider the growth patterns of specific countries. We find that revenues in developed ones not only accounted for the bulk of all banking revenues in absolute terms from 2000 to 2006 but also, excluding Japan, grew significantly faster than revenues in the world as a whole, in part thanks to the appreciating euro (Exhibit 3). The “BRIC” countries (Brazil, Russia, India, and China) were responsible for only 14 percent of the absolute global revenue growth in the six years to 2006, notwithstanding the drumbeat of expectations about growth in emerging markets during that period.
A look at growth rates presents a mixed picture, since Ireland, Russia, and Thailand posted some of the strongest results among individual countries. Interestingly, we found that from 2000 to 2006, banking revenues in Greece grew more rapidly than those in China; India was outpaced by Australia, and Latin America by the United States. At the same time, several markets—including Argentina (at –60 percent), Taiwan, and Turkey—suffered an absolute overall decline in revenues.
Growth also varied markedly by product category. In retail banking, for example, mortgages and asset management delivered double-digit growth from 2000 to 2006 in the world as a whole, while retail brokerage and deposits increased more slowly than inflation did.

What’s in store for global banking
Business mix
The mix of banking business in countries and regions varied significantly, we found, even among those at similar levels of economic development (Exhibit 4). On the one hand, retail banking represented a steady 60 to 70 percent of all revenues in most markets around the world from 2000 to 2006, but wholesale banking accounted for at least half of the industry’s revenues in China, Hong Kong, Indonesia, Russia, and South Africa. On the other hand, Canada, Egypt, Japan, Pakistan, and South Korea rank among the world’s most retail-driven markets.

Further, the mix of businesses within retail banking also varied widely. In the United States, almost two-thirds of retail revenues in 2006 came from mortgages and consumer finance—the two elements of personal financial liabilities—though this will probably change after the crisis of mid-2007. In Western Europe, such products generally accounted for a little over one-third of all revenues. The differences among emerging markets are also noteworthy: Brazil and Ukraine seem to rely on retail lending more than the United States does, while many Asian countries tend to follow the pattern of Western Europe. To take one product, in 2006 the share of credit cards in total retail revenues ranged from 23 percent in Turkey to just over half a percent in Germany; the global average was 7 percent.
Wholesale banking is similarly diverse. In 2006, only 30 percent of US wholesale-banking revenues came from lending to and deposits from large corporations and small and midsize enterprises, 47 percent from corporate banking as a whole. In the United States, investment banking, asset management, and related revenues towered over everything else. In most other countries, however, corporate banking accounted for at least half of all revenue pools in wholesale banking—91 percent in Japan, 88 percent in Turkey, and 74 percent in Latin America, for example. Notably, these ratios have stayed remarkably constant over the past six years. What’s in store for global banking
Growth drivers
Banking may be a leveraged bet on the economy, but the extent of the leverage and the part of the economy on which it is focused vary significantly (Exhibit 5). In addition to economic cycles, banking is a play on sociodemographic patterns and on trends in financial accumulation, both often influenced in turn by culture and government regulation. As became painfully apparent during the summer of 2007, for example, a big jump in household borrowing was largely responsible for the growth of US retail-banking revenues from 2000 to 2006—indeed, it explains 70 percent of the increase.
In Germany, however, household borrowing contributed only 4.7 percent of the total growth of retail revenues from 2000 to 2006; the rest came mainly from new savings and from returns on existing savings. Germany’s banking revenues increased by 4.9 percent in US dollar terms. As in most other continental European countries, a strong currency was a key driver.The impact of demographic and socioeconomic forces was far greater elsewhere. Take India, where population trends and rising salaries played almost as big a part in the growth of retail-banking revenues as savings and lending did. Together, all four drivers more than offset a $4.4 billion decline in deposit margins from 2000 to 2006.
What’s in store for global banking

Capital market multiples
Exhibit 6 calls to mind the fact that the annual growth of a bank’s investment value is its after-tax profit increase adjusted for changes in market multiples. Regional multiples, which often change relative to one another in response to investor sentiment, may add to or detract from an individual institution’s underlying performance.
Such considerations will be significant when banks return in earnest to M&A, as we believe they will. Our research suggests that the growth in banking revenues and profits expected during the next ten years should create $12 trillion in new market capitalization—a huge opportunity for players around the world.
Over the next five years, we expect a new wave of consolidation to speed the emergence of “superbanks,” with more than $500 billion in market capitalization. Today, however, global banking is the least concentrated large industry; the top 20 banks account for less than 40 percent of its global market cap, compared with an average of 67 percent in other key industries. Even the current top European and US banks aren’t guaranteed to achieve superbank status with their existing portfolios.
In our view, the winners will outshine their competitors by developing better insights into the diversity among markets and the nature of the trade-offs between risks and returns. A superior understanding of the fundamentals that drive value should help these banks exploit short-term cyclicality to their long-term advantage.

ARE SMALL BANKS in danger following increment in minimum capital requirement?

The banking industry is set to witness interesting times pretty soon with the announcement by the Central Bank that it is proposing an increment in the minimum capital requirement from the current $ 7 million dollars to between $55 to $60 million dollars.
Currently there are about 23 Universal banks in the country with majority being foreign-oriented.
The minimum requirement in the industry has been described as very small, especially as the country is striving to become a financial hub in West Africa.
Ghana achieved an unprecedented feat in the history of the West African banking when it received the nod to operate as an offshore banking destination in the sub-region.
With this development, Barclays Bank Ghana Limited had the honor of being decorated with a general license from the Bank of Ghana to spearhead the offshore banking process.
With heightened competition in the industry currently due to the dominance of foreign-oriented banks and the financial services center status of the country, analysts say the time is now for the country to accelerate growth and enhance its financial outlook to become a financial hub in the sub-region.
While everything appears to be boding well for the country, one setback that the Central Bank believes could hinder the process is the fact that the minimum capital requirement of the banking industry is woefully inadequate if this feat is to be achieved.
In this light, it recently, in a bold move, issued a statement to the effect that it is proposing an increment of the capital requirement from $7 million dollars to between $55 and $60 million dollars.
The mechanism, set to take place by the middle of next year, requires Banks and deposit taking non bank financial institutions to submit capitalization plans by the end of June 2008.
Governor of the Central Bank, Dr. Paul Acquah says the banking sector requires huge financial muscle if Ghana is to compete on the international stage.

‘‘The industry requires sufficient muscles if we are to compete on the international stage’.
‘We had the liberty to force consolidation by insisting that everybody meets the requirement but we have created a lower tier for banks who cannot meet it’, he maintained.

Submission of capitalization plans would guarantee continued access to the settlement and primary dealership systems.
To ensure an orderly consolidation, BOG says the banking system would allow for lower tier banks after December 2008 so that banks that do not meet the capital requirements will belong to the lower tier.
Banks granted licenses or provisional licenses within the last six months to date will be required to meet the new capital requirements within two years from the date of operations.

Whilst the move appears the right way to go for now, others have expressed worry for small banks in the industry.
The situation, they believe, could cause most small banks in the country to either fade out or merge with relatively bigger banks if they want to stay in business.
Though a lower tier is being created for smaller banks according to the Central Bank, it is believed that they will not benefit from the advantages that come with being a settlement bank.
Currently banks such as Barclays, StanChart, Ecobank, GCB, ADB, Stanbic as well as the Nigerian banks, are likely to meet the requirement.
Most officials of small banks this magazine have interacted with so far have expressed disappointment with the decision, insisting that the Central Bank appears to be following the Nigerian example ‘blindly’.
They maintain that the situation could reduce the current 10% banking population as the lower sectors of the economy will be cut off from the prestige banking that the new regulation will bring.
An Economist Dr. Nii Moi Thompson, upon hearing the news, called for restraint in the implementation of the regulation.
He was of the view that it could cause capital flights since most of the banks in the country are foreign-oriented.

‘Ghana’s case is different from Nigeria. If the decision is to strengthen the sector then it means profits being taken outside.
‘There is also the fear that competition could go down should more consolidation occur in the sector.
‘Government should, therefore, take steps to strengthen the rural banking sector if it wants to increase the requirement otherwise the sector will face problems’, he said.

There appears more divided opinion on the issue and I bet it will generate huge debate in the coming months.
Managing Director of Zenith Bank Ghana Limited, Andy Ojei shares a different opinion altogether.
He says that the new move will not create uncomfortable moments for the banking industry.
‘I am confident that about 20 banks will still be in operation when the new regulation comes to effect.
‘Most banks have what it takes to recapitalize and the increment is to add impetus to the industry.
‘The lower tier for the banks unable to meet the requirement is to create fairness in the industry’, he added.
Already, Chief Executive of CLAYDOD consult, Prof. Cletus Dordonu has called on government to invite the rather big banks into the country to shape the banking sector. He says the country does not really require the numerous Deposit Monetary Banks operating in the country.
He says about seven big banks with branches such as those of the Ghana Commercial Bank are all that is needed. This, according to him, may introduce a much more aggressive competition that will be capable of enhancing economies of scale and increase financial intermediation.
He says it will also help in reducing the spread between lending and borrowing rates.
As it stands now more voices are expected to be heard soon on the new regulation and the issue of whether there might be some resistance next year when the regulation begins to take effect is yet to be experienced.
Our fingers are crossed for now waiting with bated breath for the events to unfold.

ECHOES of the Christmas holidays

The only criticism for Accra-based radio station 97.3 Citi FM, during the Christmas holidays, is that it failed to organize as much events as would have been expected.
As has become a key trait of the Accra-based radio station, the station staged two memorable events in 2007 that has now become the major talking point in every part of the capital city.
It is a fact that the year 2007 has passed away effectively and a new year has just begun but the majority of the Accra population cannot stop talking about the two events.
First was the Music of Ghana Origin Show (MOGO), staged on the 1st of December at the National Theatre.
For a show that had been built around the legendary OSIBISA group, it came as a surprise to most patrons when the organizers of the event announced that OSIBISA was not on the bill and that LUMBA BROTHERS will be the surprise package.
OSIBISA had become so attached to the programme that it did not make sense to think that they will not be there.
The organizers, however, promised that the main artistes will not fail to delight the teeming fans.
Apart from LUMBA BROTHERS, celebrated high-life legends, such as C.K.Mann, Paapa Yankson, Mac Tontoh, Gyadu Blay Ambulley and the Ramblers Band were also lined up to perform.
After weeks of consistent promotions and advertisements, the 1st of December came in grand style and many a Ghanaian was dreaming of a night to savour and reminisce for years to come.
By 6pm, all roads leading to the National Theatre were packed with cars of different brands and shapes, rushing to get the better part of the theatre room for a wonderful night.
The Ramblers Band (not the original members) begun the show and boy, if not for their appearance, nothing could convince one that they were listening to a different formation of the Ramblers Band.
One elderly gentleman, who obviously adored the Band in the 1960’s, remarked that he thought he was actually hearing Eddie Sogah, Joe Atiso, Jerry Hansen and Charles Kojo on stage.
They performed ‘immortal’ songs such as ‘Ama Bonsu, Knock on Wood’ and ‘Ahomka wom’ to the delight of everyone present.
C.K.Mann stormed the stage and was so energetic that, most people wondered if he was really 70 years.
The popular ‘ADWOA YANKEY medley’ took the entire auditorium by storm and almost everybody got up to move to one rhythm or the other.
Paapa Yankson followed immediately after clad in an all white outfit interspersed with black strips.
He showed Ghanaians what they have been missing with his gentle but humorous approach to his songs.
He got everybody engrossed in his performance so much so that the Corporate Services Executive of MTN, Mawuena Dumor could not help but join him on stage.
In the minutes that followed, Ms. Dumor was on the floor, flanked by Paapa, and they both danced their hearts away.
‘OKUKUSEKU’ was one song, performed by Paapa that shook the hall of the theatre, bringing a large chunk of goose pimples in its wake.
Mac Tontoh came along with his masqueraders, to add to the growing tempo in the room, obviously created by the previous artistes.
Gyadu Blay Ambulley (the BRRRRR man) was next on the bill.
His was a performance that perhaps can pass for the BEST OF THE NIGHT.
He could virtually play all the instruments on the stage-from the guitar to the saxophone and the piano-he did everything and sang to rapturous applause from the crowd.
One highlight of his show was when he saw C.K. Mann, amongst the crowd and impulsively made a song out of it-in fact everything came so naturally to him.
BATMAN SAMINI (not really a highlife musician) took his turn and got all the marks for stagecraft.
The main artistes, LUMBA BROTHERS, did not disappoint, as they gave us memorable times with some of their greatest hits.
‘Obi Ate Mi Su Buo’, ‘Aka Akwantuom, Min Sei Da, amongst others.


The second show was dubbed ‘DECEMBA2REMEMBA’ and it was staged at the Accra International Center (AICC).
Initially a party for all hiplife artistes, it was generated into a full event last year with the organizers explaining that they were convinced the time had come to take the event to a different level-SAMINI was projected as the main performance at this particular show.
Following a postponement of the programme from its initial 24th December date to 28th, many were those who thought it might not live up to expectation.
But perhaps, the saying is true that says ‘Mishaps may be blessings’.
The turnout at the AICC on the 28th was just magnificent.
The dress code was white and jeans, a decision which gave the whole programme some uniformity.
The crowd would not stop trooping in-in fact they filled the hall to an extent that some had to stand outside the main auditorium and witness the event.
MzBel opened the event with some decent displays. Her stagecraft was not bad at all and the ladies backing her were ‘easy on the eyes’ as well, which made the whole thing wonderful.
KOFI ‘B’, one artist that still has the old highlife touch, was next in line with an effective rendition of songs like ‘koforidua flowers’. Perhaps not the best when it comes to stagecraft, Kofi B gave a life band performance that impressed many.V.I.P, one of the most celebrated hiplife groups in the country, ‘flew’ from nowhere onto the stage and got the hall screaming helplessly.
TIC TAC gave a live stage performance that was absolutely breathtaking.
He captured the attention of all present, especially the girls, and moved in correct tandem with the MEGASTAR band-it was mind boggling.
OKYEAME KWAME and his brothers, staged a poetic performance, which could compare to most poets on the African continent.
They recited and sang and danced their souls out.
Others such as Nana Quami, Praye and Wutah, showed why they are the next big things in the hiplife industry with their exhibitions.
The only gospel musician among the lot, Kwaku Gyasi, got, perhaps, the biggest applause for the night.
Songs such as ‘WASIDA YE BEBRE and ‘JEHOVAH most HIGH’, got almost everybody singing, including the Muslims (no pun intended).
Last but not least, the STAR ATTRACTION of the night, BATMAN SAMINI, did not fail his teeming fans as he managed to repeat his performance during the MOGO event.
Though he came late, he succeeded in keeping majority of the audience rooted to their seats in the hall to witness the show.
It was such a memorable night to remember that some individuals begun enquiring about the artistes that will be on the bill this year.
I thought that was quite early but the news is that the legendary OSIBISA, comprising Teddy Osei, Mac Tontoh, Sol Amarfio, Bessa Simons and the rest, will be making their third appearance on the show this year in DECEMBER.
So keep your fingers crossed and pray for December to arrive in time for another show to REMEMBER.